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Discussion Starter #1 (Edited)
I have been researching auto marketing for the past 10 years. Here is out latest article. Some of this may sound familiar. There is a message for FCA in all of this.

Here is a link to the online article: DON'T DISCOUNT, ADD VALUE INSTEAD!

As always, feel free to share your comments.


DON'T DISCOUNT, ADD VALUE INSTEAD!

The emergence of online advertising, the fragmentation of the media, the proliferation of new nameplates, and a shift in marketing budgets from HQ to the regions and dealer groups have, inadvertently, resulted in consumers being exposed to a great proportion of retail-focused ads touting deals or a discounts, and not enough ads that differentiate and create value.

Consumers have learned to expect large discounts and cash incentives off the price of automobiles. It’s become a widespread industry practice to advertise some sort of deal. But are deals and discounts what consumers really want?

CONSUMERS DON'T WANT A PRICE, THEY WANT VALUE

Consumer research shows price to be one of the poorest predictors of purchase intention. By contrast, value for money consistently ranks much higher. To put it simply, consumers want to maximize the value they receive for the price they are being asked to pay. This is true whether they are looking to buy a $16,000 Toyota Yaris or a $95,000 Mercedes S-Class.

Economic theory says that as price goes up, quantity goes down, and vice-versa, provided everything else stays constant. But as we know nothing stays constant in real life. Once we account for those things that are not constant on consumers’ minds, like brand reputation, reliability, safety, efficiency, customer treatment, etc., the economic model appears to break down. So what are we to make of all this?

Research data show that quality is the most universally desirable characteristic consumers want in a vehicle, followed by safety, and practicality. This is why automotive brands with an established reputation for quality, like Toyota, Honda, Lexus or Mercedes-Benz, are able to sell large volumes at prices that, often, are higher than those of the competition. Further, consumers tend to view brands like Toyota and Honda to deliver a better value despite commanding higher prices.

While this seems counter-intuitive, it is true because those other variables, like quality, safety, etc., create differentiation on consumers’ minds and, by doing so, grow demand. Greater demand manifests itself by a shift of the demand curve to the right –see chart below, enabling that manufacturer to sell more and charge more.

Brand differentiation, like the perception of quality, helps shift demand from D1 to D2 , enabling an automaker to do both, grow sales and charge more


Chart Key: D = demand curve, S = supply curve, P = price, Q = quantity

Source: Wikipedia.com

For a variety of reasons, the automotive industry has become obsessed with incentives. Incentives give automakers relatively quick results, and their impact can be tracked. Unfortunately, research data show that incentives do not generate demand; they simply pull future demand forward. Worse, over time, incentives have an eroding effect on the brand by creating a permanent association with discounts.

Research data shows that incentives pull future demand forward; they do not create more demand



THE ROLE OF ADVERTISING IS TO CREATE VALUE ON CONSUMERS’ MINDS

One automaker that has gone against the rest has been Subaru in the US: for the past 10 years Subaru has been able to create differentiation based primarily on Safety and Durability, through an ad campaign that has proved effective by being relevant and connecting at a personal level.

Against mainstream practice, Subaru ads focus primarily on people, showing the vehicles as the conduit that allows people to live their daily lives. Subaru has also been willing to show its vehicles in unflattering conditions, like wrecked after a rollover or a head-on collision, allowing it to tackle a serious topic like safety in an impactful, personal manner. It is by focusing on people and their needs, rather than on the vehicles, that Subaru ads connected with consumers, creating differentiation in a relatively short period of time.

As a result, Subaru sales have grown organically for an entire decade with little use of incentives. As the US market plateaus, sales growth has slowed down, but Subaru continues using some of the lowest incentives in the industry.

Subaru has shown courage with ads willing to go where other automakers are not


The difference between price and value is: price is just a number; value is a number with a context of consumer benefits. Thus the role of advertising is to give us context, not just a number.

None of this is to mean that deals and discounts don’t play a role. It simply means that by adding context, ads create value on consumers’ minds, which allows automakers to reduce their need for discounts.

Feel free to contact me with any questions or comments at [email protected]
 

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There has been much talk of the eroding margins for sedans which is one reason for the demise of sedans in the market, combined with consumer preference. Offering incentives and offering the best “deal” eat into those margins. If the same business model is applied to CUV/SUV sales, then I imagine the same issues will arise down the road. I agree, offering value is indeed attractive to consumers. I’ve often wondered if a no-haggle pricing system wouldn’t be more effective over the long run, but how would you get all makers to buy into it? And there are issues with that as well. No easy answers.
 

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Excellent article Aldo. Early in my career, I was fortunate to attend a seminar on value based marketing, specifically what low to zero cost opportunities could I offer to customers to gain a premium price. I have used those principles in every aspect of my work and try to instill them on others who are frustrated with why they can't get more for what they are offering. The old adage of "something is only worth what people will pay for it" is absolutely true. Cost is under the producers control. Worth is controlled by the buyer. Producers need to influence the buyer to drive up the perception of worth and not cater to the consumers desire of low cost. Consumers will happily buy products that are sold below cost. The trick is to get them to happily buy products that are way above cost.
 

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The lesson is to be different, not just follow the crowd.

Right now, FCA is a follower, not a leader. That is difficult for us who lived through the Chrysler days of being a real leader and making real money....then came Daimler.

If you want to change the demand curve, do something different in the market that stands out. It does not mean build a Homer-Mobile. It means give people what they want (quality, safety, value) but do it in a unique way. Toyota and Honda build that over decades. Subaru found a way to message it well and say "look at us and we won't let you down". Their sales growth proves it works.

FCA thinks it can market its way to these things without actually offering them. Yes, FCA vehicles are safe, maybe some of the safest. But they do not have quality and value. Low quality is temporarily OK if you have great customer service. FCA does not have that either.

So, we see why FCA is churning new customers at a far higher rate than the industry average. They are not retaining those they capture with styling, power, marketing, etc......because people see that the Emperor has no clothes.
 

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Excellent article Aldo. Early in my career, I was fortunate to attend a seminar on value based marketing, specifically what low to zero cost opportunities could I offer to customers to gain a premium price. I have used those principles in every aspect of my work and try to instill them on others who are frustrated with why they can't get more for what they are offering. The old adage of "something is only worth what people will pay for it" is absolutely true. Cost is under the producers control. Worth is controlled by the buyer. Producers need to influence the buyer to drive up the perception of worth and not cater to the consumers desire of low cost. Consumers will happily buy products that are sold below cost. The trick is to get them to happily buy products that are way above cost.
Like Jeeps to Jeepers? :p
 
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So, we see why FCA is churning new customers at a far higher rate than the industry average. They are not retaining those they capture with styling, power, marketing, etc......because people see that the Emperor has no clothes.
FCA like Chrysler before seems to be stuck with conquest and retention as an either/or ability. Ram has been the exception.
 
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Discussion Starter #8
There has been much talk of the eroding margins for sedans which is one reason for the demise of sedans in the market, combined with consumer preference. Offering incentives and offering the best “deal” eat into those margins. If the same business model is applied to CUV/SUV sales, then I imagine the same issues will arise down the road. I agree, offering value is indeed attractive to consumers. I’ve often wondered if a no-haggle pricing system wouldn’t be more effective over the long run, but how would you get all makers to buy into it? And there are issues with that as well. No easy answers.
Unfortunately, no-haggle pricing has been shut down in US courts for price-fixing.

Scion tried a hybrid approach by which the prices were non-negotiable; what you negotiated was the content. Needless to say, it didn't work all that well.

And yes, there are already signs that the CUV segment is becoming saturated and incentives are going up.
 

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Discussion Starter #9 (Edited)
The lesson is to be different, not just follow the crowd.

Right now, FCA is a follower, not a leader. That is difficult for us who lived through the Chrysler days of being a real leader and making real money....then came Daimler.

If you want to change the demand curve, do something different in the market that stands out. It does not mean build a Homer-Mobile. It means give people what they want (quality, safety, value) but do it in a unique way. Toyota and Honda build that over decades. Subaru found a way to message it well and say "look at us and we won't let you down". Their sales growth proves it works.

FCA thinks it can market its way to these things without actually offering them. Yes, FCA vehicles are safe, maybe some of the safest. But they do not have quality and value. Low quality is temporarily OK if you have great customer service. FCA does not have that either.

So, we see why FCA is churning new customers at a far higher rate than the industry average. They are not retaining those they capture with styling, power, marketing, etc......because people see that the Emperor has no clothes.
Indeed. And I would add: differentiation does not mean being weird.

Like you said: consumers want differentiation that matters to them, not weirdness for the sake of it --e.g. Portal?

Quality
is most universally sought-after characteristic in a vehicle. This is true in the US, in Canada, in Mexico, in Brasil and everywhere. That's why Quality --in all its manifestations: reliability, durability, craftsmanship-- is such a powerful element of differentiation.

Subaru took the two most powerful drivers of demand: Quality (in the form of Durability) and Safety, and ran with it.
 

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The only domestic campaign I can think of that begins to compete with what Subaru does (the “we’ll protect you” aspect) is GM’s OnStar campaign, which I’ve began hearing again after a long break. But it’s offset by so much other crap advertising from them on the brands.
 

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Indeed. And I would add: differentiation does not mean being weird.

Like you said: consumers want differentiation that matters to them, not weirdness for the sake of it --e.g. Portal?

Quality
is most universally sought-after characteristic in a vehicle. This is true in the US, in Canada, in Mexico, in Brasil and everywhere. That's why Quality --in all its manifestations: reliability, durability, craftsmanship-- is such a powerful element of differentiation.

Subaru took the two most powerful drivers of demand: Quality (in the form of Durability) and Safety, and ran with it.
Is the long-term problem is counter pressure to "move the metal" so dealers can reorder more from factories together with sales organization stack with people who don't know any other way?
I think Reid retirement would be a positive in factor.
 

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Discussion Starter #14
Too bad Subaru's are both ugly and noisy... they should hire a few Mazda designers/mgrs.
Goes to show, people are willing to subordinate looks to the assurance of durability and safety.
 
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I've always wondered about the "Huge Discounts" offered by dealers at the end of the year clearances. If you can suddenly sell me that car for $10,000 LESS than you wanted for it in August, why didn't you sell it to me when I offered you $5,000 more than you're selling it for now?? None of that makes any sense to me at all. My son wants a new car. I told him to wait until December 31st and go look. The car will technically be a year old, but he'll get a much better deal than he will in two weeks from now.
 

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Discussion Starter #16 (Edited)
Is the long-term problem is counter pressure to "move the metal" so dealers can reorder more from factories together with sales organization stack with people who don't know any other way?
I think Reid retirement would be a positive in factor.
Yes, the problem is the result of many things:

Like you indicate, it’s difficult to have a long-term view when everyone is focused on the end of the month. Change would need to come from the top. Subaru’s decision to go back to the fundamentals came from the top. This is necessary to keep everyone focused on the really important things.

Our attention span, including that of auto executives, has shortened to the point that no one is willing to wait months for an ad campaign to have effect on the market. Google has made us believe that we can measure advertising effectiveness in days or weeks. In the face so much confusion and time pressure, incentives give OEMs more immediate, tangible results.

And yes, the level of competence has disappeared. The advent of digital marketing brought with it a cadre of young technicians who know how to generate clicks and measure data streams, but doesn’t know how the marketing fundamentals work. The level of marketing understanding inside the OEMs has disappeared over the years. Many times, I, as an external consultant, am bringing an understanding of marketing back into the automakers.
 

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Discussion Starter #17
I've always wondered about the "Huge Discounts" offered by dealers at the end of the year clearances. If you can suddenly sell me that car for $10,000 LESS than you wanted for it in August, why didn't you sell it to me when I offered you $5,000 more than you're selling it for now?? None of that makes any sense to me at all. My son wants a new car. I told him to wait until December 31st and go look. The car will technically be a year old, but he'll get a much better deal than he will in two weeks from now.
You are right. That’s yet another problem of running a business on the back of discounts.

Even better: wait until January. January and February are the slowest months in auto retail. Consumers are trying to get over the secondary effects of the holidays.
 
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Thank you, Aldo. I'll pass that along to him. Even though we live in Florida, I'm guessing your statement will still hold true.
 

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I've always wondered about the "Huge Discounts" offered by dealers at the end of the year clearances. If you can suddenly sell me that car for $10,000 LESS than you wanted for it in August, why didn't you sell it to me when I offered you $5,000 more than you're selling it for now?? None of that makes any sense to me at all. My son wants a new car. I told him to wait until December 31st and go look. The car will technically be a year old, but he'll get a much better deal than he will in two weeks from now.
The big incentive to move the metal at the end of the calendar year stems in part from an inventory tax that is levied on vehicles still in dealer inventory as I understand it. Correct me if I'm wrong.

Aldo is correct. January, February are indeed the slowest sales months of the year. Some of us are recovering from the Christmas binge.......
 

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Yes, the problem is result of many things:

Like you indicate, it’s difficult to have a long-term view when everyone is focused on the end of the month. Changed would need to come from the top. Subaru’s decision to go back to the fundamentals came from the top. This is necessary to keep everyone focused on the really important things.

Our attention span, including that of auto executives, has shortened to the point that no one is willing to wait months for an ad campaign to have effect on the market. Google has made us believe that we can measure advertising effectiveness in days or weeks. In the face so much confusion and time pressure, incentives give OEMs more immediate, tangible results.

And yes, the level of competence has disappeared. The advent of digital marketing brought with it a cadre of young technicians who know how to generate clicks and measure data streams, but doesn’t know how the marketing fundamentals work. The level of marketing understanding inside the OEMs has disappeared over the years. Many times, I, as an external consultant, am bringing an understanding of marketing back into the automakers.
I my opinion the quickest thing to do would be separating dealer relating functions such as service as well back end support for dealers away from the sales organization.

This would a layer of tension in OEM dealer relationship.
 
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